Capital Markets

Deutsche Bank Sub CDS closed above 500bps for only the second day in its history (and the longer-term CDS curve inverted once again) as a bad day ended worse with Bundesbank member Andreas Dombret exclaimed "state support of banking sector must end," warning that it only "props up zombie banks." His pronouncements also pushed politicians to make the hard decisions and "tell banks they need structural reform."

After Wednesday’s policy statements by the Fed and Bank of Japan, a harsh light is being shined on the incredible nature of their communications. It would be wise in the current environment to structure investment portfolios with a pro-volatility bias.

"Having suffered a very bad three week period, but noting that aluminium shares “gapped” higher yesterday and the day previous after having held their 200 day moving average earlier this week. We have had derivatives in place to hedge that position, but we’ve been reducing that derivatives position all week long and we are now of course net long of equities on balance."

Japan “is the best short in the world at the moment,” according to Shannon McConaghy's Horseman Capital who said that "I don’t have a price target, but I suspect that over the next few years, a number of banks will go to zero - as in bankrupt.”

"We are, it seems to us, entering the period we shall call the “Zimbabwe-isation” of the global capital markets and we say that with all sincerity… and requisite trepidation. This will end badly of course. These things always do, but until they end… until the music finally stops… the game has to be played and the music, as it plays, has to be enjoyed."

Just after midnight east coast time, the BOJ presented its new and improved monetary policy dubbed “QQE with Yield Curve Control,” in which the central bank said it would buy JGBs such that 10-year yield remain at the current level of around zero percent. The BOJ will also buy JGBs at designated yields, and generally steepen the curve even as it failed to lower rates or add more QE. Wall Street took one look at what the BOJ came up with... and hated it immediately.

"We begin by admitting that we were uncommonly, inordinately, improperly bearish, believing that the weakness that had developed since last Friday’s collapse had merely been consolidated… We were wrong."

"The above raises an issue for non-government borrowers of US dollars such as Japanese mega banks. For example GREED & fear heard this week in Tokyo that one major Japanese bank is borrowing US$60bn from money market funds."

While there has been a plethora of calls by "invested" pundits and analysts, urging clients to stay invested or, even better, BTFD, following the Friday selloff and the Monday rebound, we have also seen some more cautious recommendations, such as this one by FBN's JC O'hara, warning clients "Buy the ‘Dead Cat’ Bounce at Your Own Risk."

The outlook for the US economy is deteriorating, yet the Fed is trying to raise overnight rates to keep unseen inflation from rising. Success in its strategy could force consumption lower, unemployment higher, and exacerbate real output contraction. The market, however, should not underestimate the Fed’s power based on its apparent incompetence.

The physical holdings of Chinese gold ETFs have surged five-fold from 7 tonnes at the end of January, to 35 tonnes at end of August. The Huaán Yifu Gold ETF, which was holding 23 tonnes in August, entered the global top 15 list.